Proper estate planning should always consider estate and gift tax rules. In recent years, we have seen the federal estate, gift and generation skipping transfer (GST) tax exemption rise from a stable $1 million to a very temporary $5 million. As those changes took place, many states enacted their own estate or inheritance tax, in addition to the federal tax.
If your estate plan does not keep up with these and other changes in the tax laws, it may not work the way you intended when it was established. That could cause your estate to pay too much in taxes and leave less to your beneficiaries than you had planned or have your estate distributed in ways you did not anticipate.
Special Planning Opportunities During the Rest of 2012 Only
The final months of 2012 are a time of special opportunity. Until December 31, 2012, an individual can give up to $5.12 million ($10.24 million, if married) in lifetime gifts without paying gift taxes. For most Americans, that will allow them to transfer as much as they want to family members without having to worry about gift taxes. For those with larger estates, combining the $5 million gift and GST tax exemptions with discounting, installment sales, and other advanced planning techniques can allow the tax-free transfer of huge amounts of wealth.
However, unless the President, House of Representatives and Senate all agree otherwise, on January 1, 2013, the federal estate, gift, and GST tax exemptions will drop from $5.12 million to about $1.4 million and the tax rate on everything over $1.4 million will increase from a flat 35% to a sliding scale starting at 45% and topping out at 55%. At the same time, unless the President, House of Representatives and Senate all agree otherwise, income tax rates will also increase, the tax on long-term capital gains will increase from 15% to 20% and the favorable tax treatment of dividends will end.